Founder Mode or Manager Mode: A delicate balance for startups

As Indian start-ups evolve from Unicorns into stock market bulls, the question of who would be in charge of these rapidly growing companies becomes pertinent. A recent article by Paul Graham of Y Combinator titled “Founder Mode” contrasts founders and managers and has become viral recently. Paul Graham contrasts the business founder, who leads with a unique disruptive vision and intuitive grasp of the business, against a manager with a structured approach, about hiring people and managing a hierarchy. Yet, as several Indian business success stories demonstrate, the key to long-term growth may not lie in choosing one approach over the other but in finding a delicate balance between passion and process.

Founders Passion

The “founder mode” of leadership helps startups to disrupt incumbents and deliver new products. Usually, this is due to the unique vision of the founders, who have identified a gap in the market, taken risks, and worked assiduously to succeed. Infosys capitalized on the outsourcing boom due to the founder’s insight into the global delivery system of utilizing Indian engineers to develop software for American businesses. Recently, Ola, Oyo, and Paytm have gone on to disrupt the taxi, hospitality, and fintech businesses and expanded considerably. However, while the founder mode can lead to early growth, it may come with significant risks. An example of this is Housing.com, whose founder’s mercurial leadership style led to friction with investors. Similarly, WeWork, once a darling of the startup world, collapsed under the weight of the founder’s unchecked risk-taking. Neumann’s disregard for financial discipline exposed WeWork’s unsustainable business model. While the founder’s passion can provide rapid growth, it needs to be structured to avoid destabilizing the company.

Professional processes

On the other hand, the manager mode is about delegating responsibilities and ensuring that the business processes are structured. While this style curtails the founder’s “entrepreneurial freedom,” a more scalable business results. Without a clear organizational structure, companies are overwhelmed by unsustainable growth or financial mismanagement. Most venture capitalists are interested in growing the business from its idea stage to a more stable business that is IPO “friendly.” Venture capital obtains the highest returns from those start-ups that can be floated in the stock market. In the case of WeWork, the pre-IPO accounting scrutiny resulted in the discovery of a poor business model. Start-ups such as WeWork are prone to use “Vanity metrics,” such as locations, number of customers, and community-adjusted EBITDA, which are not important for the stock market.

Infosys shifted to a professional managerial system to scale up its business and take up new opportunities. Flipkart shifted from being founders-led to a professional system under Walmart. The most famous start-up, Apple, too, has had a love-hate relationship with professional management. Steve Jobs, in the founder mode, led Apple through a period of innovation but was famous for his obsessive micromanagement. Steve Jobs ceded managerial control to John Sculley for 10 years when Sculley took the company to $ 8 billion from $ 800 Million but failed in new product development. However, Steve Jobs returned with a creative spark and he led the company into its successful foray into handheld devices. Today, Apple is led by Tim Cook, a professional manager who has grown the company to a $ 3 trillion valuation, with a strong focus on innovation.

A delicate balance

J.N. Tata was an entrepreneur par excellence. However, when starting the Empress Mill at Nagpur, he appointed Mr Bezonji Mehta, a goods agent with the railways, to manage it. Tata recognized the importance of delegating management to a professional while he was focused on growing the company into new areas such as steel and power. Similarly, in the case of Reliance Industries, under Dhirubhai Ambani, professional managers were given importance. Mukesh Ambani, a business school graduate, now leads the company.

By identifying a dichotomy between founders and managers, Paul Graham encourages founders to make an extreme choice. The founder’s job is forever to set the vision, find VC funding, and manage all key functions while ignoring or second-guessing managerial advice. Paul Graham is miffed by the gaslighting that he believes managers and VCs offer. On the contrary, he advocates founders breach the hierarchy and preach the message directly to key staff members outside the top tier. Constantly breaching managerial layers can create confusion and destabilize operations when companies grow. Instead, founders should align managers with their vision. Successful founders like J.N.Tata understood the importance of trusting their management teams to execute their vision. It is important to understand that successful companies such as Tata, Reliance, and Infosys were built by founders who stuck a balance between founders’ passion and managerial process. While the founders continue to provide vision, managers have built the vision into a complex business structure that can fulfill that vision. Hence, long-term success lies in not choosing to stick to passion or process but learning to integrate.

 

Co-Authored by Prof Meera Aranha, Professor, Accounting Economics and Finance Area, T A Pai Management Institute (TAPMI) & Prof Srinivasa Reddy N, Assistant Professor, Marketing Area, T A Pai Management Institute (TAPMI)